Chapter 6, Problem 1QP

To determine

The CPI in the base year.

Explanation of Solution

CPI is a measure that examines the changes in the price levels of a basket of consumer goods and services in the current year with reference to the base year. CPI can be calculated as the ratio of total dollar expenditure for a particular market basket of goods and services consumed in the current year to the total dollar expenditure for the same market basket of goods and services consumed in the base year in percentage terms.  The CPI in the base year is calculated as follows:

$\begin{array}{c}\text{CPI}=\frac{\left(\text{Total dollar expenditure on market basket in base year}\right)}{\left(\text{Total dollar expenditure on market basket in base year}\right)}\times 100\\ =100\end{array}$

Thus, the CPI in the base year or bench mark year is 100. The bench mark CPI is used to compare the changes in the price level in the current year to the price level of the same basket of goods in the reference year.

Economics Concept Introduction

Consumer Price index (CPI): Consumer price index is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from base year.